On Global Games in Social Networks of Information Exchange

It is a common perception that information plays an important role in crises: in particular, exchange of local information about economic or political fundamentals is crucial in determining the outcomes of crisis events. Coordination games of incomplete information have been used as stylized models of crisis phenomena such as currency attacks (e.g., Morris and Shin (1998)), debt crises (e.g., Morris and Shin (2004)), bank runs (e.g., Goldstein and Pauzner (2005)), and political regime change (e.g., Edmond (2005)). To the best of our knowledge, all existing applications of such games to crises assume a continuum of agents and a private (and possibly, in addition, a public) noisy signal about the fundamentals at each agent; there are no complex patterns of communication among the agents. In this work we provide a model of local information sharing through a social network (involving a finite number of discrete agents) and its effect on the outcomes. We seek to answer the question of how do the outcomes depend on the network topology. We study a coordination game of incomplete information with a finite number of agents, in which each agent receives noisy signals concerning the strength of the status quo (i.e., the fundamentals) according to her position in a social network. The action space for each agent is binary: attack the ∗This research was partially supported by the Air Force Office of Special Research, under contract FA9550-09-1-0420. We are grateful to Daron Acemoglu, Marios Angeletos, George Mailath, and Antonio Penta for useful feedback and suggestions. We also thank participants at the Sixth Workshop on the Economics of Networks, Systems and Computation (NetEcon 2011), and participants at the Interdisciplinary Workshop on Information and Decision in Social Networks at MIT on May 31 and June 1, 2011. †To whom correspondence should be addressed. Email: [email protected]